Oil and gas operators optimistic about second half of 2019

A recent study from advisory firm L.E.K. Consulting has found that oil and gas operators are optimistic about commodity prices, capital investment, and development cost. The 2019 Oil and Gas Study surveyed 200 North American exploration and production (E&P) companies in February 2019.

In 2018, oil prices started strong in the first half, leading analysts to call for $100 per barrel prices by year end. However, markets ended up falling to an 18-month low of $42 to end the year.

Heartened by price gains in the first quarter, most of the respondents in L.E.K.’s survey expect prices to stabilize at $55-$60 per barrel this year, with a portion expecting $65-$75. L.E.K. itself projects that 2019 oil and gas prices will run about flat or mostly higher than 2018’s $65 WTI (West Texas Intermediate) barrel and $3.17 per MMBTU averages. Though not a cool $100, respondents figure that the projected price levels are high enough to at least maintain capital spend throughout the year.

"Even though positive market sentiment matches with recent first-quarter price gains, the question is whether 2019 can maintain a rally and avoid another tale of two halves," Nilesh Dayal, report coauthor and managing director at L.E.K. Consulting, said. "And operators think it can. In fact, they believe prices will be high enough to maintain capital spending throughout 2019 and possibly even drive growth relative to last year."

Though respondents are confident these price levels could grow capital spend over 2018, more than 50% said they would need three to four quarters of sustained pricing to adjust their budgets. This restraint and budget discipline is perhaps a response to the $45 December. As such E&Ps want to see a longer stretch of stable prices than they’ve historically needed to (about 1-2 quarters) to spur on budget increases.

Approximately 80% of respondents said they expect stable costs in 2019, with the rest expecting modest increases of up to 5%. Transportation and logistics costs were selected as the most likely to increase, underscoring a skepticism towards pipeline capacity debottlenecking. Despite a 635,000 barrel per day boost in the Permian from the PAA Sunrise, BridgeTex Pipeline, and Enterprise Echo projects, respondents likely foresee longer-than-expected takeaway constraints.

Sand, water, pumping services, and drilling all scored low on expected percentage of cost change, however.

The survey found that respondents view well optimization solutions as the most critical technology solutions. Fracturing/stimulation, reservoir recovery optimization, and drilling categories scored highest in importance of current technology. In terms of new areas, however, enhanced oil recovery/improved oil recovery were tagged as the most important play for investment. EOR/IOR tech recovers oil following primary and secondary recovery, using methods like fluid expansion, gravitational drainage, and gas drive. L.E.K. found the high ranking of EOR/IOR somewhat unexpected, given its limited application in tight and shale reservoirs.

Digital solutions ranked highly as well, with logistics tracking, drone technology, and generic “oilfield digital” rated as important.

Looking forward, the L.E.K. report recommends that E&P oil and gas firms maintain budget flexibility, shaping a balanced asset strategy while pulling operational cost levers like digital solutions. Consolidation is one avenue to achieve the above goals.

Oil and gas deals – excluding Chevron’s acquisition of Anadarko Petroleum – have fallen to a 10-year low, however. Mergers were down 93% in Q1 2019 over the same period last year, suppressed by global uncertainty – including a slowing Chinese economy, unclear US fiscal policy, and energy transition initiatives.

"In the coming year, E&P operators should investigate ways to maintain budget flexibility, identify meaningful operational cost levers, like digital solutions, and form a sustainable and balanced asset strategy," Dayal concluded. "Consolidation can accomplish these goals and really should remain a strategic consideration for larger E&Ps."

Related: How US independent oil operators must rethink their strategies